Backed by EU interests, Greeks may bear 50-year bonds

Nick Skrekas

Published 3:04 AM ET Mon, 14 Oct 2013
CNBC.com

Adri Aderval | Flickr | Getty Images

Athens

Greece has said it is looking into the technical matters of issuing a 50-year bond to further restructure its debt and make it more sustainable. While it took many by surprise since the country has been shut out of global markets since 2010, there are powerful interests that may make it happen.

Recently Greek Finance Minister, Yiannis Stournaras said: "I hope we will have a 50-year bond. That would mean that our debt would be considerably reduced across 50 years." This plan is just one more measure to make Greek debt more viable and avoid the pressing need for a deep Official Sector Involvement (OSI) or haircut that is poisonously unpopular in Europe.

In 2013 Greece will have a gross public debt of about 322 billion euros which will top about 175 percent of gross domestic product (GDP), and it is anything other than manageable. It may need more cash injections worth about 10 billion euros to meet a funding gap from mid-2014 until end of 2016.

The idea of making Greek debt sustainable until 2022 has also been scotched by the Greek Parliament budget oversight body in a rare honest assessment. They said "it is an illusion to believe that Greece can return to the financial markets as early as 2014 and its debt will need a further 'haircut' to become manageable."

Greece has received 240 billion euros in two bailouts and it is seeking to replace and extend bilateral loans worth between 53 billion euros to 110 billion euros with the 50-year bond. Naturally, such a move is aimed to avoid an OSI official haircut because simply extending bilateral loans and lowering interest will not be enough to make public debt repayable. The local population has hit the wall and cannot tolerate or pay more tax hikes, nor can it accept further deeper cuts to wages and pensions as International Monetary Fund chief Christine Lagarde recently accepted.

It seems for Greece and the euro zone that the theory of "extend and pretend" is not enough just on its own. Greece will need much more time and more favorable terms to pay back even the 130 billion euro EFSF (European Financial Stability Facility) loans. The repayment of these loans to the temporary bailout mechanism were supposed to begin in 2025 but a 50-year bond issues to cover these makes more financial sense and is more favorable for the debt-strapped country.

Fixed income market gurus believe that the thought of a Greek 50-year bond issue is a pipe dream from a country besieged by Europe, but there is method to this apparent madness. Further debt relief measures will be discussed in the second quarter of 2014 and this will include such a bond issue. Sometimes when one ambitious and difficult solution is the least worst option for your lenders, they may push hard to realize it to avoid an OSI.

In our world where "black swan" events happen weekly, such a bond issue is more and more likely to avoid the abyss of an OSI. Insiders in Athens say such an issue is not entirely unlikely, despite significant doubts on the part of market participants. The first thing the government hopes will eventuate is that two of the four large systemic banks that are burdened with the same non-investment grade Greek sovereign rating will be able to access capital markets, particularly since recently we learned of hedge fund interests in their highly devalued shares.

The finance minister also hopes that Eurostat will be able to verify a primary surplus for 2013 next April, and is praying that it beats market expectations of 340 million euros. Ideally, then the Greek state wants to issue a 3 billion euro 5-year bond to tap markets after almost 5 years. If that works, then there are fewer and fewer hurdles from of an ultra-long 50 year issue for at least 55 billion euro to pay off the EFSF, the temporary EU bailout mechanism.

That would bring a smile to the faces of all euro zone members who will have shifted more weight off them from Greece to global players. Obviously there will be significant pressure on the European Central Bank (ECB) and euro zone central banks to participate in the issue, since they have a vested interest to avoid an OSI. Furthermore, euro zone governments will also pressure their big banks to get on board, improving the chances of full coverage of such an issue.

While a prospective 50-year bond won't be a magic bullet for Greek debt sustainability it offers more than just rare hope to improve the nation's debt profile. In addition, it may actually be a good bet for some since intelligent market operators that understand the Mediterranean country has opportunities - like ample unexploited resources, an oversold real estate market and undervalued businesses.

Don't write off the unlikely prospect of a Greek 50-year bond issue just yet; there are powerful vested interests that would be delighted by it and can make it work.

Nick Skrekas, Ph.D., is a leading Greek economic analyst in Athens and has deep experience as a legal practitioner. As a senior advisor he handles projects for the world's biggest advisory firms in Greece and the Balkans. He is a regular commentator on global leading websites and on TV.